Separated? Consider Filing Separately Too

YOUR MONEY - TAXES

February 27, 2000|By Julian Block

Married couples need no reminder that they usually benefit from joint filing when one mate earns all or considerably more of the income than the other. That tax break, though, can become a trap for spouses who break up but do not obtain a divorce or a legal separation.

They still have the option to file jointly, assuming both partners are willing to do so. Nevertheless, one, or both, might find it more advantageous to file separately.

Among other drawbacks for joint filers, they are jointly and severally liable. So if the IRS audits a joint return and demands some extra taxes, it can dun either mate for the entire amount of any additional taxes, penalties and interest that become due.

It makes no difference that they have since separated, one spouse has died, or that the extra taxes are attributable to the business or income of only one of them.

There is, however, relief from joint liability for someone who qualifies under the innocent spouse rules.

Caution: Whatever your reasons for avoiding tax togetherness, the two of you may be in for an unpleasant and expensive surprise when filing time rolls around. The taxes you will pay as married persons filing separately can be considerably more than the taxes you would owe as joint filers or even as two unmarried persons.

There are other disadvantages for a married couple who choose to file separately.

For instance, each of them must itemize deductions for contributions and the like or they must both use the standard deduction that people automatically get without having to itemize.

In effect, the mate who itemizes forces the other one to follow suit.

Special rule for married people living apart:

Fortunately, there is a way out of this trap for many married persons. An often-overlooked break entitles you to be treated as if you were unmarried for tax year 1999, provided you satisfy certain requirements.

Result: Even though you are not divorced or legally separated, you are excused from having to use the rates for a married filing separately and get the benefit of the more favorable rates for a head of household.

To take advantage of head of household rates, you have to pass a four-step test.

1. You file a separate return from your spouse.

2. Your spouse did not live with you at any time during the last six months of 1999. CAUTION: The Tax Court ruled that a husband failed to qualify as a head of household when he and his wife lived in separate areas of the same residence. Living apart under one roof does not pass muster.

3. You paid more than 50 percent of the cost of keeping up your home for 1999.

4. Your home was, for more than half of 1999, the principal residence of your child, stepchild or adopted child, whom you can claim as a dependent.

TIP: You are not necessarily disqualified from filing as a head of household just because you are unable to claim the child. As the parent with custody (the mother, in most cases), you continue to be eligible, if either one of these two exceptions apply:

You sign IRS Form 8332, allowing the 1999 exemption to be claimed by your husband, the parent without custody, or

A pre-1985 agreement grants custody to you and the exemption to your husband if he provided at least $600 in 1999 for the support of the child.